Birmingham Business Law Bloghttp://redmountainlawblog.com
A blog published by Red Mountain Law Group providing legal updates and tips to businesses and individuals.Mon, 16 Feb 2015 19:38:07 +0000enhourly1http://wordpress.com/http://s2.wp.com/i/buttonw-com.pngBirmingham Business Law Bloghttp://redmountainlawblog.com
What does Alabama’s new gun bill mean for employers?http://redmountainlawblog.com/2013/05/21/what-does-alabamas-new-gun-bill-mean-for-employers/
http://redmountainlawblog.com/2013/05/21/what-does-alabamas-new-gun-bill-mean-for-employers/#commentsTue, 21 May 2013 17:01:53 +0000http://redmountainlawblog.com/?p=1126]]>

On May 20, 2013, the Alabama House voted 73-28 to approve SB 286, the Omnibus Gun Bill, that will affect employers’ ability to limit employees from carrying firearms onto business property. The bill is now on its way to Gov. Robert Bentley, who is expected to sign. [UPDATE: Governor Bentley signed the bill on May 22, 2013.]

The bill directly addresses the conflict that arisen between business owners who want to prohibit the presence of firearms on their property, and the rights of gun owners who want to be able to carry their firearms in their vehicles. The bill resolves this conflict strongly in favor of employees and gun rights.Under the bill, employers may not prohibit an employee from transporting or storing firearms in his or her private vehicles as long as the employee’s vehicle is parked in a permitted public or private parking area, and the firearm is out of sight and locked in the vehicle’s trunk, glove box, or other secured, affixed container. The bill also prohibits employers from asking employees whether they are transporting or storing firearms in their private vehicles. Moreover, the bill prohibits employers from taking an adverse action against an employee for transporting or storing a firearm in his or her vehicle if the employee has complied with the foregoing requirements of the bill.

The bill provides for serious remedies against employers who wrongfully terminate employees for transporting or storing firearms in their private vehicles while on an employers’ property. The bill provides for full recovery by wrongfully terminated employees, including reinstatement to their same positions held at termination, reinstatement of full fringe benefits and seniority rights, compensation for lost wages, benefits and other renumeration, and payment of reasonable attorneys’ fees and legal costs incurred.

The bill, however, allows an employer to regulate or prohibit an employee from carrying or possessing a firearm during and in the course of the employee’s official duties. It also allows a business owner to prohibit people licensed to carry firearms from bringing firearms onto the premises if a notice prohibiting concealed weapons is prominently posted at every entrance.

While the Business Council of Alabama fought against the bill, it scored a major concession that provides almost absolute civil immunity for criminal acts that occur on business premises. The bill states that business owners have no duty to guard against the criminal acts of a third party, whether it involves the use of a firearm or not, unless the business owner knows or has reason to know that the criminal acts are occurring or are about to occur on the premises that pose an imminent probability of harm to an invitee on the property.

The bottom line is that upon the bill being signed by Gov. Bentley, Alabama employers can no longer absolutely prohibit employees from bringing firearms on to the business premises, but must allow employees to bring firearms onto company property as long as the firearms are out of sight and locked away in the employees’ vehicles. However, Alabama employers may properly restrict employees from carrying firearms during the performance of their jobs.

Check your employee handbook to see if you have a policy prohibiting firearms on company property. If so, you will need to revise your policies to comply with Alabama law once the new law goes into effect.

]]>http://redmountainlawblog.com/2013/05/21/what-does-alabamas-new-gun-bill-mean-for-employers/feed/0redmountainlawImageHow Do You Craft a Successful Social Media Policy?http://redmountainlawblog.com/2013/04/03/how-do-you-craft-a-successful-social-media-policy/
http://redmountainlawblog.com/2013/04/03/how-do-you-craft-a-successful-social-media-policy/#commentsWed, 03 Apr 2013 17:51:22 +0000http://redmountainlawblog.com/?p=1122]]>The Birmingham Business Journal asked its social media followers and local experts, including RMLG’s DeWayne Pope, about their best practices for creating a social media policy. DeWayne’s tip?

“While there are laws and other legal concerns employers should be aware of, employers should also remember that social media is about developing community and organic, two-way communication with customers. Putting too many restrictions in a social media policy shows a lack of trust in your employees and is a fundamental failure in understanding and harnessing this communication medium. One of the best policies I’ve seen simply stated, ‘Be professional. Represent us well.’”

]]>http://redmountainlawblog.com/2013/04/03/how-do-you-craft-a-successful-social-media-policy/feed/0redmountainlawUSCIS Releases a New Form I-9http://redmountainlawblog.com/2013/03/11/uscis-releases-a-new-form-i-9/
http://redmountainlawblog.com/2013/03/11/uscis-releases-a-new-form-i-9/#commentsMon, 11 Mar 2013 14:00:02 +0000http://redmountainlawblog.com/?p=1118]]>On March 8, 2013, the U.S. Citizenship and Immigration Services (“USCIS”) released a new version of the Form I-9 (find it here). According to the USCIS Web site, the “Handbook for Employers Guidance for Completing the Form I-9 (M-274)” is in the process of being updated to correspond to the new form and will be released next week.

Employers should use the new Form I-9 as soon as possible but have until May 7, 2013 before they will be penalized for not using it. Eemployers do not need to complete the new Form I-9 for current employees for whom there is already a properly completed Form I-9 on file unless reverification applies.

DeWayne Pope
DeWayne Pope LLC

]]>http://redmountainlawblog.com/2013/03/11/uscis-releases-a-new-form-i-9/feed/0redmountainlawExpanded FMLA Rules Take Effect March 8, 2013http://redmountainlawblog.com/2013/03/08/expanded-fmla-rules-take-effect-march-8-2013/
http://redmountainlawblog.com/2013/03/08/expanded-fmla-rules-take-effect-march-8-2013/#commentsFri, 08 Mar 2013 18:37:36 +0000http://redmountainlawblog.com/?p=1113]]>On February 6, 2013, the U.S. Department of Labor issued its final regulations implementing two expansions in the Family and Medical Leave Act (“FMLA”) under the National Defense Authorization Act of 2010 (“FY 2010 NDAA”) and the Airline Flight Crew Technical Corrections Act (“AFCTCA”). The final rule also revises and clarifies a few other existing regulations. The new rules take effect on March 8, 2013. Some of the key provisions of the rules include:

Pre-existing injuries or illnesses, aggravated during active duty service. Military caregiver leave is now extended to family members to care for current servicemembers suffering from a pre-existing injury or illness incurred during or aggravated while in the line of duty.

Definition of service member expanded to include certain veterans. Military caregiver leave is expanded to allow care for a covered veteran undergoing medical treatment, recuperation, or therapy for a serious injury or illness incurred or aggravated in the line of duty. Under previous regulations, such leave was not available to care for former members of the Armed Forces (e.g., veterans).

Exigency Leave for family members. Leave is available for employees whose spouse, daughter, son, or parent serves in the Regular Armed Forces, where the military member is deployed to a foreign country. Previously, exigency leave was afforded to family members of individuals serving in the National Guard or Reserves only.

More exigency leave for family members. Family members may now take up to 15 calendar days (rather than 5 days) as qualifying exigency leave to spend time with a service member who is undergoing short-term rest or recuperation during a period of deployment.

The USDOL also has issued a list of FAQ on the new rules that can be found here. It also has put together a side-by-side comparison of the update rules and the 2008 regulations that can be found here. As a result of the new rules, the USDOL also created a revised FMLA poster that can be found here.

Employers covered by the FMLA (those with 50 employees within a 75-mile radius) should carefully review their current FMLA policies and handbooks and ensure that any necessary revisions are made to reflect the new changes, as well as update their FMLA poster with the new version.

DeWayne Pope
DeWayne Pope LLC

]]>http://redmountainlawblog.com/2013/03/08/expanded-fmla-rules-take-effect-march-8-2013/feed/0redmountainlawCongress Avoids Fiscal Cliff And Passes First Major Tax Increase in Almost Twenty Yearshttp://redmountainlawblog.com/2013/01/03/congress-avoids-fiscal-cliff-and-passes-first-major-tax-increase-in-almost-twenty-years/
http://redmountainlawblog.com/2013/01/03/congress-avoids-fiscal-cliff-and-passes-first-major-tax-increase-in-almost-twenty-years/#commentsThu, 03 Jan 2013 17:32:24 +0000http://redmountainlawblog.com/?p=1076]]>Early Tuesday morning, the U.S. Senate passed a bill aimed at averting spending cuts and tax increases that comprised the dreaded “fiscal cliff.” House Republicans were extremely critical of the bill for not including enough spending cuts. However, the House approved the bi-partisan legislation under the extreme pressure of trying to avoid the fiscal cliff and indications from Senate Democrats and Republicans that that the Senate would not entertain a modified bill. This showdown is one of many in the coming year as Congress must tackle increasing the debt ceiling and the expiring government spending bill in the next few months as well as long term projects such as reform of the Internal Revenue Code and entitlement reform.

Naturally, each party is claiming some kind of victory with respect to the legislation. Republicans are claiming victory because certain tax cuts enacted in 2001 and 2003 were made permanent. One top Republican noted that this part of the legislation represents the first step of tax reform. The Democrats are claiming victory because this legislation represents the first real tax increase in twenty years—something the Republicans were desperately trying to prevent.Key provisions of the new legislation include:

Applies a new top income tax rate of 39.6% on household incomes over $400,000 for individuals and $450,000 for married couples filing jointly. Expiring Bush-era lower income tax rates for household incomes under $400,000 for individuals and $450,000 for married couples filing jointly are made permanent.

The tax rate on capital gains and dividends will permanently be set at 20 percent for those with incomes above the $400,000/$450,000 threshold. The tax rate on capital gains and dividends will remain at 15 percent for most other taxpayers.

The Personal Exemption phase-out will start at household incomes of $250,000 for individuals and $300,000 for married couples filing jointly.

The itemized deduction limitation will start at household incomes of $250,000 for individuals and $300,000 for married couples filing jointly.

Makes permanent the existing $5 million exemption amount for estate and gift tax.

Increases top estate tax rate applicable to estates over $5 million from 35% to 40%.

Federal unemployment insurance will be extended for 1 year for approximately 2 million Americans.

The Alternative Minimum Tax received a permanent patch.

The Earned Income Tax Credit, the Child Care Tax Credit, and the American Opportunity Tax Credit will be extended for 5 years.

The payroll tax holiday will expire.

Numerous friends and clients have inquired regarding the new law’s provisions applicable to estate taxes, so we will expand on the above information. As stated above, the new law makes permanent the $5 million dollar per person exemption. This exemption amount will continue to be indexed for inflation each year (the exemption amount for 2012 was indexed to $5.12 million per person, for example).

While the new law increases the top rate applicable to estates of more than $5 million, it continues the concept of portability. This means that a surviving spouse can use his or her deceased spouse’s unused exemption amount in addition to his or her own exemption amount to protect assets passed at the surviving spouse’s death.

The new act also provides that the estate and gift taxes will remain unified, meaning that an individual’s full $5 million exemption amount can be used during lifetime or at death. Prior to 2011, the gift tax exemption amount remained at $1 million even when the estate tax exemption amount went up to $2 million and then $3.5 million, which meant that gifts during life in excess of $1 million required the payment of gift taxes even though an individual could give more than $1 million free of estate taxes if that gift took place at death. Keeping the exemptions unified makes the same exemption from taxes apply whether a gift is made during life or at death.

While the increase in the top estate rate is certainly not welcome news, there are at least a few positives we can take away from the new legislation: (i) the $5 million per person estate tax exemption amount did not decrease, (ii) taxpayer favorable concepts such as portability and the unified estate and gift tax credit have been retained, and (iii) taxpayers now have some certainty when it comes to estate and gift tax planning.

]]>http://redmountainlawblog.com/2013/01/03/congress-avoids-fiscal-cliff-and-passes-first-major-tax-increase-in-almost-twenty-years/feed/0small_5873374114redmountainlawImageConclusionhttp://redmountainlawblog.com/2012/12/31/conclusion/
http://redmountainlawblog.com/2012/12/31/conclusion/#commentsMon, 31 Dec 2012 15:00:09 +0000http://redmountainlawblog.com/?p=1067]]>My main goal in writing this series was to bridge the gap between the expectations of the business owner and the abilities of the lawyer. A gulf exists between the two, and hopefully these articles help to fill the gap. I have tried to provide a little education, which I believe is necessary to have a better understanding of the process.

I have been harsh, at times, on lawyers, and I think lawyers deserve some of the blame for the system. In an effort to market our services, we inevitably pump up our own abilities beyond what we can actually perform and downplay the ability of other lawyers1. We create complexities that only other lawyers can understand. We attempt to create barriers to our knowledge, our forms, our courts, etc. that prevent commerce. As business people build roads around our services, we need to realize that lawyers are at fault for creating a system that needlessly slows down commerce instead of appropriately facilitating it.

However, in conclusion, I want to address the business people. When we market to you and when we serve you as clients, you are the customer, and to an extent, the customer is always right. (At least, we want to try and help you and not tell you what is really on our mind.) There are some more generic things that I would like to tell clients, which perhaps is not what you want to lead with when you are trying to obtain or retain work.

First, get the right lawyer for the right job. Don’t think that one attorney can do everything.2 The world is more complicated than that. If you bring a litigator to a complex transaction (or vice versa), you will get the heartache that you deserve. Some lawyers, including myself, spend a large portion of their practice managing or delegating to other lawyers in order to get the right attorney. Sometimes you need a lawyer to help engage other lawyers; sometimes you can do it on your own. Regardless, have enough wherewithal to know that one lawyer is not a jack of all trades.

Second, tell the lawyer all the facts. If you let or require a lawyer to work in a vacuum, their work is not going to meet your expectations. Part of our job is to gather the facts and decide what is relevant. If you let us sort out what is and what is not relevant, you will be better served. If you artificially limit our role, our performance will be subpar. If you are working with other lawyers, tell your attorneys. A second pair of eyes is always appreciated; second guessing is not. Also as you discuss your problem with your attorney, do not bring in random stuff from the internet and pretend that you know more than you actually do. If you have seen or heard about something, feel free to ask your attorney. Be careful with your terminology, sometimes industry jargon is confused for widely known legal terms.

Finally, and most importantly, do not lose your ethics/moral compass3. There is a difference between what you can do in business and what you should do in business. A lot of our economic system, particularly financing, is based on trust. Individuals loan money to other individuals. Individuals invest in other companies. We must remember that even if these arrangements are through large public companies, we are always dealing with individuals. Our system is based on faith that the receiver of the loan or investment can be trusted to deal with our resources.

Contracts must be read in a spirit of “how do we get along?” – not “how do I take advantage of someone else?” You can always finagle the words to your advantage. Ultimately, however, that type of interpretation will just lead to an equally finagled reading on the other end. You may be able to hang your hat on one phrase, but the other party can hang their hat on the other phrase. If you take advantage of one party, even if you are entitled to do so under a contract or other legal document, they will be looking to take advantage of you somewhere else. Our system is based on good faith and fair dealing, and regardless of whether you are legally required to have that duty, if you do not deal with someone in that manner, you will not have my respect, regardless of whether you are my client or not.

Mike Goodrich
Goodrich Law Firm, LLC

1 One of the most laughable things the Alabama state bar requires is the use of the disclaimer, “No representation is made that the quality of legal services provided …” The phrase is archaic, born of an age where, as professionals, we did not (allegedly) compete with one another. The bar needs to recognize that we do compete every day with one another; this disclaimer is just another overlooked piece of verbiage of no effect; in fact, all lawyers are making representations that they are better than another lawyer in almost of everything they do. Why can’t we just let the market sort out the legal marketplace? By attempting to regulate the market, we underestimate (at our peril as lawyers) the sophistication of the public. Yes, there are people who are actually in ambulances who need protection from the ambulance chasers, but our professional regulations cast a large net over a small problem. We need to move boldly into the new millennium.

2 While I am taking pot shots at the bar in the footnotes, let me add another area where I believe the professional ethics fall short – the lack of specialization. Numerous times, I have done a search and replace in attorney marketing material for “specializes” to change it to “focuses on.” I have been practicing small business law since 2003. Why can’t I say I specialize in it? Doctors have specialties; shouldn’t the bar focus on facilitating the various specialties within our profession? I am not advocating that we allow just anyone to put out a website that they “specialize” in something. However, we currently have very few certifications – elder and patent law. We need more, and we need to encourage lawyers to market what they actually do (as opposed to what they want to do) with a better certification system and decreased regulation on attorneys being “specialists.”

3 While I am taking potshots at institutions, let me tell you that I have found the biggest offender of this “do what is right” motto is the self-professed Christian. Routinely, when I hear someone is “a good Christian,” I prepare for the worst because someone is about to get taken advantage of. While this is a broad generalization, it is one based on experience where probably 90% of the time that “good Christian” is behaving with a seriously warped moral compass. My experience has been that good Christians do not pay their bill, get in fights over petty disagreements, and swindle for their own economic advantage. I know that most Christians do not do this and most are good human beings. However, the more boisterous of the Christian bunch are doing their best to bring down the entire group. Don’t tell me you are a good Christian; show me that you are one.

]]>http://redmountainlawblog.com/2012/12/31/conclusion/feed/0notebookredmountainlawnotebookWinding Up Investments Gone Bad From A Business Perspectivehttp://redmountainlawblog.com/2012/12/27/winding-up-investments-gone-bad-from-a-business-perspective/
http://redmountainlawblog.com/2012/12/27/winding-up-investments-gone-bad-from-a-business-perspective/#commentsThu, 27 Dec 2012 15:00:46 +0000http://redmountainlawblog.com/?p=1061]]>Sometimes, despite management’s best efforts to make the business succeed, the business fails. Sometimes, because of management’s insistence on personal gain, the business fails. Sometimes, the two are commingled. Regardless, the result is the same. The company does not perform up to par, and the expectations of return need to be adjusted downward or possibly written off entirely. The reasons for business failure are numerous – market failure to materialize, regulatory burden change, lack of capital, partners sleeping with people other than their spouses, completely incompetent management, and/or failure to appreciate the challenges of a new endeavor and increased competition. These reasons and numerous others often contribute to the derailment of otherwise splendid ideas.

If you are the management, go back and review the articles that talked about getting investors. Did you treat your investors in an upright and forthcoming manner? Did you keep your investors apprised of the risks? Did you give them good updates? If so, congratulations. I cannot guarantee that you are going to come through unscathed, but you are starting from a good position. Now is the time when, unfortunately, you need to cash in your goodwill and start again. Swallow your pride and unravel your mess. If you have not been forthcoming or if you have used funds for personal gain, hold onto your hat and get a lawyer because your investor(s) may not be so forgiving.

If you are the investor, then be realistic about the company’s value. Figure out what your rights are from a legal standpoint and proceed accordingly. I am not advocating not holding people accountable or letting people off the hook. However, what I am advocating is making a calculated decision based on a fair value of the company with the inclusion of fees. Money, not emotion, should dictate your course of action. Did you invest more than you could afford to lose in a small private company? If so, you should have known better.

If you are an employee owner, you face a more daunting challenge. The analogy often used in these situations is that of the leaky lifeboat. Three people are on a lifeboat that springs a leak. One of them must get off. The senior partner owns the boat. Does the junior partner or the associate take the jump? In this situation, there are a million different reiterations, twisted story lines, and could haves/should haves, but the situation is almost always the same: the organization cannot support all of the people. These are difficult situations because, inevitably, someone is going to have to changes jobs, possibly even careers. However, if the partners remember that at one point they thought that working together would be better than working separately, and then work to unravel the web that they have woven, they can usually get out of a bad situation.

These events are often referred to as business divorces, and just like martial divorces, they can get ugly and messy. Sometimes, however, just like in martial divorces, if both parties behave themselves, the matter can be resolved quickly (i.e. a no fault divorce). As with divorces, if a business divorce is prolonged typically the only people who win are the lawyers. Rarely do both sides enter into these proceedings with clean hands. Both sides should do everything in their power to avoid a protracted dispute.
More so than in any other area dealt with in these topics to date, maturity in these situations by all parties pays enormous dividends.

There is a role for lawyers in the process. As things go sideways, having an understanding of the legal situation vis-à-vis one another is enormously helpful. Understanding the various clauses, understanding the applications of various duties, understanding the points of possible disagreement, and understanding the relative positions of the parties is essential in order to have an informed choice of which direction to take.

Additionally, as you move forward, if the parties are not seeing eye-to-eye, having counsel to understand the legal impact of business decisions is essential. Can I raise my compensation? What happens if I take on this debt? Can I hire this grossly unqualified person who happens to be my sister? Often, at the outset of conflict in a business, a cause of action for minority oppression does not exist. Only after the conflict has festered does a party take an action that forms the basis for a legal remedy. Involving counsel may not prevent a lawsuit, but it can certainly help identify actions that may increase the likelihood of a fight.
And yes, lawyers can fight for you. At some point, these disputes go to litigation. Indeed, much of commercial litigation surrounds fights with people who have ownership in various entities. While a business lawyer may be able to provide guidance at first, eventually when you go into litigation, you will need a litigator.

That said, and as a final point, I will say that I do hold people accountable for their choice in attorney. These conflicts are often slow moving disputes – not because of a slow court system but because the dispute itself is typically a festering situation. Accordingly, the parties will try to resolve the dispute themselves. Eventually lawyers are brought in. If, at this point, you bring in a scorched earth trial attorney, you are sending one message. If you bring in a business lawyer, you are sending another message. If you bring in your fraternity brother friend lawyer, you are sending another message. You may, for a variety of reasons, want to send that particular message. However, you need to realize that you are sending a message, and you need to make sure you are saying what you meant to say.

When discussing this topic, I am taking a broader view of what encompasses a generational transfer to include not just family transfers, but transfers to younger employees. Often, a merger from a third party is not desirable or available. The industry, the nature of the business, the fact that the revenue is tied up in the personality of the employees (common in professional services), the whims of the owners, or some combination of these factors may create a situation where an owner or ownership group will need to explore additional options. Selling or transferring the business to the owner’s heirs or to key younger employees often provides owners with an opportunity to exit.

From a business perspective, these transfers can be difficult. These transactions are personal. In order to accomplish them, the value of both the older and younger generation must be discussed. The worth of both the older generation, as well as the younger generation, must be discussed. With family transfers, the issues multiply; siblings, both in and outside the business, professionals, and family members all cause a myriad of issues. Books have been written on the subject of family businesses, and far be it from me to believe that I have anything particularly insightful to offer on the difficult topic of managing the family business.
However, from a legal perspective, these transfers are not incredibly difficult to execute. Assuming that you do not need to revise your corporate governance agreements, executing this transaction is relatively simple. You execute a transfer document, you pay the consideration, and it is typically all you need. That said, you do need to pay attention to the formalities. There is a good rule of thumb – document all of your agreements. When you are dealing with family, make doubly sure.

While this is a good rule of thumb, it is important to pay attention to what is “legally required” and what is “the plan.” The plan may be that in five years, assuming good business growth, the shares will be transferred for $x (or some formula of $x). However, the owners may or may not be legally required to make the transfer. All parties, but particularly the older generation, will want to have this structure in place for a lot of reasons. Defining “good business growth” or a similar concept is fine from a business perspective, but nebulous for a lawyer. Business conditions and where the people are in their careers may change. Creating a legally binding obligation so far in advance may prove problematic for a host of reasons. You do not want to give up the kingdom until you know how the princes and princesses will rule. This is true for both family and non-family generational transfers.
Structurally, the first step may be the most difficult. Often, you will see an older owner transfer a minority share or small sliver of equity to the younger generation. If the relation was to sour, the shares could be reacquired, and while the process might be painful, it would not be fatal. The parties can see how they behave as shareholders, see how increased responsibility is handled, etc. Again, this is true for both family and non-family generational transfers.

However, the parallel for family and non-family transfers ends when it comes to pricing. For non-family transfers, the price discussion is of a more true marketplace value. Often a business owner will look to the value he or she has created and will want to extract that value for retirement or other financial goals. While they may be generous to an extent, they are not looking to transfer the company without consideration. The discussion between the younger and the older generation focuses on what value has been created, what value will need to be created, and who is responsible for either. These conversations are difficult, and no magic formula exists for a perfect deal. However, numerous companies have gone through these negotiations and strived and survived; it is part of being in business.

In more mature companies with a buy/sell agreement and several owners, the valuation formula in the shareholder or operating agreement often becomes the defining metric. Over time, people come in and people go out based on that metric. Since the metric is presumably tied to some moniker of value, the younger generation is incented to pay out the older generation at the metric and then increase the value for his or her own well being. The valuation formula becomes a self-fulfilling prophecy that allows for a transfer of equity from the retiring owner(s) to the younger owners.

Promissory notes also can provide a good structure to facilitate the transfer of ownership from one generation to the next regardless of whether it is a family or non-family transfer. By selling all or a portion of ownership and then financing the transaction with a promissory note made by the younger generation, the purchase price is fixed. Ideally, the earning of the company – through salary or distribution – will support the payments. This allows the younger generation to make the purchase and incents the younger generation to make sure the company remains healthy so that the note payments can be generated. The older generation is also incented to insure a smooth transition. Without a healthy company, the younger generation’s ability to pay off the note is questionable. The younger generation’s only real asset may be the equity of the company, so if the note is defaulted upon, the older generation will have to take his or her old company back – not the desired result of retirement.

However, with respect to the pricing of family transactions, other considerations come into play. Estate tax is an omnipresent issue that may affect the valuation perspective. Other siblings may affect the transfer. The owner’s spouse may have some thoughts about the transfer. These issues are tricky, but as with all of this, a business is not treading new ground. By being thoughtful and deliberate, seeking good advice, and planning in advance, a company can be transferred from one generation to another. The process is difficult, but not impossible, and the accomplishment of making such a transfer can be a source of great non-economic pride and satisfaction.

Many reasons exist that may prompt an owner or owners to begin to at least consider that the time has come to sell a company. Something may be happening with the industry generally; something may be happening with the owner personally. But for whatever reason, “it is time to get ready to sell.” From a financial perspective, being sure you have several good quarters of financial gain is always key, and inevitably, you will want the business running on all four cylinders before you go through a sale. However, what do you need to do from a legal perspective to get your company ready to sell, or as it’s colloquially called, get your proverbial stuff together?

Simply put, you want to have written agreements with all of the various parties that make your company run, or if having an agreement in place is not necessary due to the nature of the business, you want to be sure that the liabilities are limited (in particular, claims against your stock). A business should be engaged in and practicing best practices. If you go back through the articles included in this series, you can begin to construct a checklist. You want your trademarks done, you want your supplier contracts signed, your lease agreement in place, etc. If you boot strapped your way from a start-up to a good size business, you may not have had the time or resources to have everything perfect. Now is the time to go back and clean up those issues.

If you want a more comprehensive business checklist, get a stock or asset purchase agreement. If you do not have a thorough one1, then you can go to the SEC website and pull a stock or asset purchase agreement from a recent industry transaction. Look at the representations and warranties of the seller in this agreement. Often the bulk of the agreement is the representations and warranties. A seller’s representations and warranties are the statements that the seller makes to the purchaser concerning the company. Statements such as “seller has good title,” “no litigation exists,” and “seller has disclosed all liabilities” are standard representations made by the party selling the company to the party purchasing the company2. A list of these standard representations is attached at the end of this article. These representations and warranties, which may vary from industry to industry, are a good starting point to build a corporate checklist.

Because a business is a mesh of tangible and intangible property, a purchaser will want to know that they are getting what they purchased. A company is not like a car; you cannot go and take a company out for a spin. Additionally, if you do not like the business, you cannot return it to the dealer to get a new one. Once purchased, a company is sold. Thus, the purchasers will want the seller to make statements about various aspects of the company. In these representations, you will see what concerns a purchaser, and thus the representations in a purchase agreement are a good place to start for assembling a legal checklist of what needs to be done prior to selling a company.

As you look through this checklist, you will notice that some things will not be able to happen instantaneously. If you delayed filing for a trademark, for example, you cannot get your trademark registered overnight. You can file for registration, but you will not get it registered for at least six months. Some corporate hygiene issues can be handled easily, but not necessarily quickly. That said, not every item can or should be completely resolved. The important part as you “clean up” a company is that you have a plan for handling all of the issues. For example, you may have litigation outstanding. Outstanding litigation does not necessarily preclude a sale of business; if the risk is quantified, reserved for, and being handled, a purchaser may get comfortable, particularly if the litigation is not material to the fundamentals of the business.

Shareholder issues are one of, if not the, thornier issues that you come across at this stage. Ideally, you will have in your formation documents, and if applicable, later investment documents, all of the equity fully accounted for and properly documented. However, my experience has taught me that such is not always the case. Promises are made to employees. Investors may believe that have more or less rights than they actually do. Without a definitive idea of who owns the company and precisely what percentage is owned, enormous problems can creep into a transaction. If you have an offer to sell for a million dollars, the shift of one percentage point puts $10,000 in one pocket and takes it away from another pocket. Sorting these issues out in the hypothetical realm is much easier than sorting these issues out when you are close to closing.

Those things that the business owner has conveniently neglected, piles of paper in the corner of the desk, and outstanding items that are unresolved must be worked out on the front end. As you begin to shift into a sales mood, getting resolution is a must.

1 At this point, you want the longest one you can find. You may want to start from a less comprehensive form when the transaction is being negotiated, but for the purpose of getting in your mind what is required, the longer and scarier the form, the better.

2 Of course, the lawyer’s job in this process is to turn the simple phrase, “you are good, and you are getting what you paid for,” into a fifty-word document.

3 List developed from ABA Model Asset Purchase Agreement.

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http://redmountainlawblog.com/2012/11/29/mergers/#commentsThu, 29 Nov 2012 15:44:12 +0000http://redmountainlawblog.com/?p=1043]]>Eventually, all good (and bad) things come to an end. While it is true that some companies last an extremely long time and some companies do get passed down from generation to generation, the overwhelming majority of businesses come to an end. Because no one person can work forever, business owners must contemplate an eventual transition or exit. Exits come in all shapes and forms, good and bad and everything in between. Investors will always focus on an exit (they need their money), and with the public markets difficult to access, a merger provides the desired liquidity. But beyond this concrete example, the reasons to merge are endless: owners transitioning, strategic consolidation within the industry, business owners just wanting something (anything?) to get out.

Having practiced in this area for over 15 years, a short article on mergers might seem easy. However, when you are seriously considering a merger, the typical themes – stock versus asset, valuation, due diligence, employee issues standard representations – transcend a short article. For the business owner who is thinking about selling (and really everyone should always be at least thinking about it), I want to give some tips I have picked up along the way and explain some of the seemingly endless contradictions that come in this area of business.

First, a merger takes a long time, but it can be done in a real short period of time. For sellers, mergers should be thought about in the long term. From a business perspective, you will want to know when in the cycle you are selling, you will want to prepare, you will want all due diligence issues sorted out. If you start talking to purchasers without having your proverbial stuff together, your business presentation is off, and ultimately, issues cost you money. However, except regulated industries and large mergers that require antitrust review, a transaction can close quite quickly. Yes there is some work, but if everyone (company and advisors) has their proverbial stuff in order, it can happen quite quickly.

Which leads me to the second contradiction – price is the most important thing, but personality is the most important thing. Money is at the heart of all deals, but the personalities involved drive the discussion. Mergers almost always involve a career transaction for at least one, and usually more, individuals. At a minimum, an owner who prior to the merger control will no longer have control post -merger. Employees are typically affected also. As a consequence, these very emotional human issues move, halt, change, and shape the merger discussion. But one should never lose sight of the ultimate driving force – the money.

And the money is determined again in a contradictory manner – by consistent formula and financial calculation culminating simply in the arbitrary agreement between a willing seller and willing buyer. Industries often have metrics upon which companies are bought and sold; sometimes a one times revenue formula is used, sometimes a multiple of EBITA, sometimes book. However, because a deal relies solely on a buyer reaching a contract with a seller, religious adherence to a formula is futile. Sometimes the parties would be better off throwing a dart at a range of numbers to get a deal done.
And the contract itself presents an array of contradictions.

Stock versus asset is a crucial question. Are you going to buy all of the assets of the company or purchase the stock? This is important as the liability and taxes are structured one way in one deal and another way in another. An asset sale usually provides a purchaser with additional liability protection and is often favored in situations where there is liability. However, a lot of liability transfers with the good will of the company, so an asset purchase agreement has its limitations with respect to liability concerns.
Reps and warranties and indemnification are important. In negotiating contracts, the representations and warranties – what a seller says about his or her company – become a crucial part of the contract. A seller will then indemnify the purchaser for any misrepresentation. These are important if any issue post-closing comes up. Of course, a seller can still get sued for fraud, and an indemnification is only as good as the money the seller has after closing.

Because of all of these contradictions, securing and listening to advisors who have experience in mergers is crucial. These advisors know how mergers work, and as a consequence, bring familiarity to a process that is unfamiliar to you. They should have the experience that is necessary to advise you throughout the process. However, as with everything in mergers, ultimately you are the person responsible. Whether you are paying for the business or selling a business, the responsibility lies on the business owner to help drive the process and not be driven by the process. Listen to your advisors, but don’t have blind faith in your advisors.

Mike Goodrich
Goodrich Law Firm, LLC

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